Know Your Client – or KYC – is a popular term used in the banking or financial field. It is increasingly common for banking institutions, credit companies, and insurance agencies to require that their customers provide them with detailed information to ensure that they are not involved with corruption, bribery, or money laundering. The general legal obligation on the part of financial institutions in the UK to identify its customers was first introduced in 1994. It was officially passed into law when the UK Government passed the 2007 Money Laundering Regulation which made it mandatory for financial institutions to know who they are conducting business with.
Is KYC really needed?
This is the question that many investors have been asking as KYC requirements are becoming more stringent. This has been made evident through the CDD threshold being lowered to €10,000 for retail and professional investors. In the current uncertain economic and political climate our economies are very susceptible to laundered illegal money, so it is vital for us to have this framework in place. This money can be used for a whole host of activities including terrorist financing which the Western Governments try and blockade as is evident through the Iranian and North Korean sanctions.
We have seen the ever-increasing significance and reliance being placed upon KYC by regulators as some of the biggest banking fines have been for failings and breaches in KYC/AML checks. In 2017 Deutsche Bank was fined £500 million by the FCA for serious AML failings. This set a precedent for other banks that they must comply with the money laundering regulations. Deutsche Bank was not the first and last to be fined as numerous banks have been fined over the course of many years. However, the fine sizes are increasing, and the regulators are putting pressure on the financial institutions to comply. This all comes in the wake of the Panama Papers scandal, published in April 2016, which showed many big banks helped launder funds by accepting cash from various shell companies.
Where is KYC presently?
More and more emphasis and focus are being placed on the correct implementation of KYC and AML policies across financial and credit institutions. On June 19th, 2018, the fifth EU Anti-Money Laundering Directive (AMLD 5) was published in the official journal of the European Union. The AMLD5 modifies the fourth Anti-Money Laundering Directive (AMLD4) released only in 2015. The EU Commission proposed the revised AMLD in July 2016 as part of its Action Plan against terrorism announced in February 2016-, after the attacks in Paris and Brussels-, and as a reaction to the Panama Papers. The AMLD 5 entered into force on July 9th, 2018. Member states are obliged to transpose the modified regulations into national law by latest January 20th, 2020.
What is the future of KYC in the UK?
Several investors and people are debating what the future holds for KYC as Brexit is becoming a reality and the UK is still trying to find its place within the EU post-Brexit. Numerous people are of the opinion that the UK will become less compliant with AML/KYC regulation to attract/retain foreign investment. This cannot be the case for the UK. As a nation, the UK has a global standing within the developed world and is renowned for its financial sector services. It will always remain compliant with the regulations which continue to become more stringent as time progresses. The KYC market may experience a slow-down, however financial transactions and business needs will always remain. Cash will be exchanged for services and before the services can be provided client due diligence will be conducted. So the future of KYC, not just in the UK but worldwide, is set to grow continuously as business needs continue to expand.
By Liya Hussain, a Vantage Point Consultant